ecn 3204 economics of agriculture food system sedef akgÜngÖr professor dokuz eylül university...

ECN 3204ECONOMICS OF AGRICULTUREFOOD SYSTEM

SEDEF AKGÜNGÖRProfessor

Dokuz Eylül UniversityFaculty of Business

CLASS NOTES on:WORLD DEVELOPMENT

REPORT 2008(Summary)

What can agriculture do for development?

Agriculture has features that make it a unique instrument for development: Agriculture can work in concert with other sectors to produce faster growth, reduce poverty, and sustain the environment.

Agriculture contributes to development in many ways: Agriculture contributes to development as an economic activity, as a livelihood, and as a provider of environmental services, making the sector a unique instrument for development.


As an economic activity: Agriculture can be a source of growth for the national economy, a provider of investment opportunities for the private sector, and a prime driver of agriculture-related industries and the rural nonfarm economy.

As a livelihood: Agriculture is a source of livelihoods for an estimated 86 percent of rural people.

As a provider of environmental services: In using (and frequently misusing) natural resources, agriculture can create good and bad environmental outcomes. It is by far the largest user of water, contributing to water scarcity.


Agriculture’s contributions differ in the three rural worlds:

Agriculture-based countriesAgriculture-based countries:: Agriculture is a major source of growth, accounting for 32 percent of GDP growth on average.

Transforming countriesTransforming countries:: Agriculture is no longer a major source of economic growth, contributing on average only 7 percent to GDP growth, but poverty remains overwhelmingly rural (82 percent of all poor).

Urbanized countriesUrbanized countries:: Agriculture contributes directly even less to economic growth, 5 percent on average, and poverty is mostly urban.


Countries follow evolutionary paths that can move them from one country type to another:

China and India moved from the agriculture-based to the transforming group over the past 20 years, while Indonesia gravitated toward the urbanized (Figure 2) .


Agriculture has a strong record in development!

Agriculture has special powers in reducing poverty.

Agriculture can be the lead sector for overall growth in the agriculture-based countries.

Agriculture can be the lead sector for overall growth in the agriculture-based countries.

Yet agriculture has been vastly underused for development!

Parallel to these successes are numerous failures to use agriculture for development.

Rapid population growth, declining farm size, falling soil fertility, and missed opportunities for income diversification and migration create distress!

Policies that excessively tax agriculture and under-invest in agriculture reflecting a political economy in which urban interests have the upper hand.



New opportunities are emerging!

The world of agriculture has changed dramatically since the 1982 World Development Report on agriculture.

Dynamic new markets, far-reaching technological and institutional innovations and new roles for the state, the private sector, and civil society all characterize the new context for agriculture.


New opportunities are emerging!

The emerging new agriculture is led by private entrepreneurs in extensive value chains linking producers to consumers and including many entrepreneurial smallholders supported by their organizations.

An emerging vision of agriculture for development redefines the roles of producers, the private sector, and the state.


What are effective instruments in using agriculture for development?

Increase access to assets: Household assets are major determinants of the ability to participate in agricultural markets.

• LAND: Land markets, particularly rental markets, can raise productivity, help households diversify their incomes, and facilitate exit from agriculture.• WATER: Access to water and irrigation is a major determinant of land productivity. • EDUCATION: Education is often the most valuable asset for rural people to pursue opportunities in the new agriculture.• HEALTH: Widespread illness and death from HIV/AIDS and malaria can greatly reduce agricultural productivity and devastate livelihoods.


Make smallholder farming more productive and sustainable.


Improving the productivity, profitability, and sustainability of smallholder farming can have policy aims such as:

• Improve price incentives and increase the quality and quantity of public investment,• Make product markets work better,• Improve access to financial services and reduce exposure to uninsured risks,• Enhance the performance of producer organizations,• Promote innovation through science and technology,• Make agriculture more sustainable and a provider of environmental services.


Moving beyond farming: A dynamic rural economy and skills to participate in it.

Creating rural employment:Creating rural employment: The rural labor market offers employment possibilities for the rural population in the new agriculture and the rural nonfarm sector.

Providing safety nets.Providing safety nets. Providing social assistance to the chronic and transitory poor can increase both efficiency and welfare.



How can agriculture-for-development agendas best be implemented?

Defining an agriculture-for-development agenda:

• Opening and widening pathways out of poverty through smallholder farming, wage employment in agriculture, wage or self-employment in the rural nonfarm economy, and migration out of rural areas—or some combination thereof.



In using agriculture for development, a country should formulate an agenda with the following characteristics:

Established preconditions Comprehensive Differentiated Sustainable Feasible.


In agriculture-based countries: Through achieving growth and food security.



How can agriculture-for-development agendas best be implemented? In transforming countries: Through reducing rural-urban income disparities and rural poverty.



In urbanized countries: Through linking smallholders to modern food markets and providing good jobs.

For smallholders in urbanized countries, being competitive in supplying supermarkets is a major challenge that requires meeting strict standards and achieving scale in delivery.



Implementing an agriculture-for-development agenda presents two challenges:

1- Managing the political economy of agricultural policies to overcome policy biases, underinvestment, and misinvestment.

2- Strengthening governance for the implementation of agricultural policies, particularly in the agriculture-based and transforming countries for which governance gets low scores (Figure 12).



The future offers more promise for agriculture for development!

The prospects are brighter today than they were in 1982.

The anti-agriculture bias in macroeconomic policies has been reduced thanks to broader economic reforms.

There is also evidence the political economy has been changing in favor of agriculture and rural development.



Yet these improved conditions alone are not enough.

Smallholders must have their voices heard in political affairs, and policy makers and donors must seize the new opportunities. What we need are:

New roles for the stateNew roles for the stateStrengthening civil society and democracyStrengthening civil society and democracyA mix of centralized and decentralized servicesA mix of centralized and decentralized services Improving donor effectivenessImproving donor effectivenessReforming global institutions.Reforming global institutions.


What now? Toward implementation: If the world is committed to reducing poverty and achieving sustainable growth, the powers of agriculture for development must be unleashed! IT REQUIRES:IT REQUIRES:

Broad consultations at the country level to customize agendas and defi ne implementation strategies. Having agriculture work in concert with other sectors and with actors at local, national, and global levels. Building the capacity of smallholders and their organizations, private agribusiness, and the state.Institutions to help agriculture serve development and technologies for sustainable natural resource use. Mobilizing political support, skills, and resources.

Growth and Poverty Reduction in Agriculture’s Three Worlds

• Three out of four poor people in developing countries -883 million people- lived in rural areas in 2002.

• Most depend on agriculture for their livelihoods, directly or Indirectly.

• So a more dynamic and inclusive agriculture could dramatically reduce rural poverty, helping to meet the Millennium Development Goal on poverty and hunger.


• There are many success stories of agriculture as an engine of growth early in the development process and of agriculture as a major force for poverty reduction.

• Most recently, China’s rapid growth in agriculture has been largely responsible for the decline in rural poverty from 53 percent in 1981 to 8 percent in 2001.

• Agriculture has also offered attractive business opportunities, such as high-value products for domestic markets and international markets.


• Parallel to these successes are numerous failures in getting agriculture moving.

• Most striking is the still-unsatisfactory performance of agriculture in Sub-Saharan Africa, especially when contrasted with the green revolution in South Asia (Figure 1.1).

• Food security remains challenging for most countries in Africa, given low agricultural growth, rapid population growth, weak foreign exchange earnings, and high transaction costs in linking domestic and international markets.


The Structural Transformation

• The process of economic development is one of continuous redefinition of the roles of agriculture, manufacturing, and services.

• Patterns of structural transformation have been observed historically in most developed countries and are currently taking place in developing countries that experience growth.

•In most Sub-Saharan countries over the last 40 years, the share of labor in agriculture has declined dramatically despite almost no growth in per capita GDP, as illustrated by Nigeria (figure 1.2).


Agriculture’s essential but declining contribution to growth as countries develop:

• Many poor countries still display high agricultural shares in GDP and employment (an average of 34 and 64 percent, respectively, in Sub-Saharan Africa).

• The large share of agriculture in poorer economies suggests that strong growth in agriculture is critical for fostering overall economic growth.

• As GDP per capita rises, agriculture’s share declines, and so does its contribution to economic growth.


Agriculture’s power for poverty reduction:

• The large and persistent gap between agriculture’s shares in GDP and employment suggests that poverty is concentrated in agriculture and rural areas.

• As nonagricultural growth accelerates, many of the rural poor remain poor and rural-urban income disparities widen.

• For example, in East Asia, the ratio of rural-to-urban poverty increased from about 2:1 to more than 3.5:1 between 1993 and 2002, despite a substantial decline in absolute poverty.


Agriculture’s power for poverty reduction:

• 81 percent of the worldwide reduction in rural poverty during the 1993–2002 period can be ascribed to improved conditions in rural areas.

• The comparative advantage of agricultural growth in reducing poverty is also supported by econometric studies.

• However, as countries get richer, the superiority of growth originating in agriculture in providing benefits for the poor appears to decline.


The Three Worlds of Agriculture for Development

• Countries are classified in this report as agriculture-based, transforming, or urbanized, based on the share of aggregate growth originating in agriculture and the share of aggregate poverty ($2.15 a day) in the rural sector.

• Three clusters of structurally different economies emerge, each with distinct challenges for agricultural policy making.


In the agriculture-based economies (most of them in Sub-Saharan Africa);

• Agriculture contributes significantly to growth, and the poor are concentrated in rural areas. The key policy challenge is to help agriculture play its role as an engine of growth and poverty reduction.

• The key policy challenge is to help agriculture play its role as an engine of growth and poverty reduction.


In transforming economies (mostly in Asia and North Africa and the Middle East);

• Agriculture contributes less to growth, but poverty remains overwhelmingly rural.

• The rising urban-rural income gap accompanied by unfulfilled expectations creates political tensions.

• Growth in agriculture and the rural nonfarm economy is needed to reduce rural poverty and narrow the urban-rural divide.


In urbanized economies (mostly in Eastern Europe and Latin America);

• Agriculture contributes only a little to growth.

• Poverty is no longer primarily a rural phenomenon.

• Agriculture acts like any other competitive tradable sector, and predominates in some locations.

•In these economies, agriculture can reduce the remaining rural poverty by including the rural poor as direct producers and by creating good jobs for them.


•The three country types capture the major distinguishing features in the role of agriculture for growth and poverty reduction across countries.

• Even so, substantial variations remain among and within the countries in each type.


Agriculture’s development potential shortchanged

• The agriculture-for-development connections revealed by the evidence reviewed here have too often not been exploited.

• Certainly agriculture has yet to perform as an engine of growth in most Sub-Saharan countries, where populations are slowly urbanizing without a reduction in poverty.

• Even in the transforming countries, the rural poverty and income disparity challenges remain huge, despite spectacular growth in some countries.


Agriculture’s development potential shortchangedFour hypotheses could explain this divide between promise and reality:

• Agricultural productivity growth is intrinsically slow, making it hard to realize the growth and poverty-reducing potential of agriculture.

• Macroeconomic, price, and trade policies unduly discriminate against agriculture. • There has been an urban bias in the allocation of public investment as well as misinvestment within agriculture.

• Official development assistance to agriculture has declined.


Is the agricultural sector less productive?

• Some argue that agriculture is inherently less dynamic.

• The argument goes as far back as Adam Smith, who posited that productivity was bound to grow slower in agriculture than in manufacturing because of greater impediments to specialization and the division of labor in agricultural production.

• Comparing the rate and sources of growth in value added in agriculture and in the nonagricultural sectors over the past 15 years shows different pat-terns over the three worlds of agriculture (figure 1.6).


Is the agricultural sector less productive?

• In transforming countries, the extraordinary dynamism of the nonagricultural sector is reflected in its sustained high growth rate based on both the increase in

employment and in labor productivity—as evident from this decomposition of growth.

• Rates of growth in agriculture and non-agriculture are similar in the agriculture-based and urbanized countries. And labor productivity in agriculture grew faster than in nonagriculture in each of these two country categories.


Are macroeconomic, price, and trade policies discriminating against agriculture?

• There is considerable evidence that slower growth in agriculture relates to the macro and sectoral policy biases against it.

•The landmark Krueger, Schiff, and Valdés (1991) study clearly documented how 18 countries taxed agriculture relative to other sectors.

• Interventions induced a 30 percent decline in the relative price of agricultural products with respect to a nonagricultural price index.



• Since then, most developing countries have substantially improved their macroeconomic policy and reduced their biases against agriculture.

• A composite score comprising three key elements of sound macroeconomic policy (fiscal, monetary, and exchange rate) shows a clear improvement since the mid-1990s in almost all Sub-Saharan African countries (figure 1.7).

• A positive association is also observed between improvement in that score and the performance of agriculture.



• Econometric evidence at the country level shows that periods of rapid growth in agriculture and substantial poverty reduction have followed reforms.

• Even where macroeconomic and price policies have been reformed, international trade policies continue to impose substantial costs on developing country agriculture.

• Only modest progress has been made to date in reforming these policies, and much depends on a successful outcome of the Doha Round of trade talks.


Is public spending biased toward urban needs?

• Successful countries have invested in agriculture before taxing it (directly and indirectly) to finance industrial development.

• The share of public spending on agriculture in agriculture-based countries (mostly in Africa) is significantly less (4 percent in 2004) than in the transforming countries during their agricultural growth spurt (10 percent in 1980) (table 1.3).


Is public spending biased toward urban needs?

• In Asia and Latin America, the decline in public funding for agriculture partly reflects agriculture’s diminishing importance in the economy (table 1.3).

• There have been recent reversals in several countries though, including China, India, and Mexico, motivated by the need to fight poverty and narrow the rural-urban income gap.

• Agricultural spending has often been biased toward subsidizing private goods (fertilizer, credit) and making socially regressive transfers.

• The bias toward private goods often worsens as countries’ GDP per capita rises.


Development assistance to agriculture declined dramatically

• The share of agriculture in offi cial development assistance (ODA)52,53 declined sharply over the past two decades, from a high of about 18 percent in 1979 to 3.5 percent in 2004 (figure 1.8).

• It also declined in absolute terms, from a high of about $8 billion (2004 US$) in 1984 to $3.4 billion in 2004.

• The bigger decline was from the multilateral financial institutions, especially the World Bank.



• Failed agricultural development efforts also influenced the expectations of donors.

• The “agroskepticism” of many donors may well be related to their experience with past unsuccessful interventions in agriculture, such as large-scale integrated rural development and the training-and-visit system for extension, which were both promoted heavily by the World Bank.

• Poor understanding of agrarian dynamics, weak governance, and the tendency for donors to seek one-size-fits-all approaches contributed to the failures.



• Since 2001, government and donor interest in agriculture has increased, at least in discourse and modestly in support.

• This is happening because of a turnaround in the reasons for the decline in support to agriculture.


The Political Economy of Agricultural Policy

• A better understanding of the political economy of agricultural policy making is necessary to address the continuing policy neglect and under- and mis-investment in the sector.

• The process of agricultural policy making is the outcome of a political bargain between politicians and their citizens.


The process of agricultural policy making

State objectives and policymaking:State objectives and policymaking:

• Politicians enjoy different degrees of autonomy.

• They have their own objectives, for example, to be reelected or to maintain legitimacy, to improve the welfare of their constituency or to pursue some vision for the country.

•Economic crises can give policy makers more autonomy to engage in reforms that were difficult in normal times.



State objectives and policymaking:State objectives and policymaking:

• More often, policy makers seek to maximize political support within their resource constraints. Political support is usually related to the expected policy-induced changes in welfare.

• Farm subsidies were introduced in the 1930s in the United States when farm incomes dropped 50 percent more than those of their urban counterparts.

• In democracies, the votes of farmers can be very influential.



Collective action and policymaking:Collective action and policymaking:

• Organized groups of citizens can have strong influence over the policy process. The power of lobbies depends on their ability to overcome the costs of organization and freeriding.

• Extensive empirical evidence shows that small and more geographically concentrated groups fare better, as do groups better organized and with strong leadership.

• The urban poor, by contrast, do not need a high degree of organization to stage a public protest, as illustrated by the food riots over the price of bread in Egypt.



Collective action and policymaking:Collective action and policymaking:

• Industrial groups usual ly have more financial resources to influence politics, and they often belong to social elites, whose social capital facilitates lobbying.

• Democratization in many developing countries has increased the possibilities for smallholders to form organizations and influence politics.

•In West Africa, for example, producer organizations and parliaments are increasingly involved in the formulation of agricultural strategies and Policies.


A New Role for Agriculture in Development

The case for using the powers of agriculture for poverty reduction and as an engine of growth for the agriculture-based countries is still very much alive today.

However, despite convincing successes, agriculture has not been used to its full potential in many countries because of anti-agriculture policy biases and underinvestment.

New opportunities for realizing this potential are present today, but also coming are new challenges, particularly in pursuing a smallholder-driven approach to agricultural growth that reconciles the economic, social, and environmental functions of agriculture.

ecn 3204 economics of agriculture food system sedef akgÜngÖr professor dokuz eylül university...

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